THG Plc (THG) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for our H1 2026 results. We've delivered a very strong first half with good revenue growth, a significant step-up in profitability and a much improved free cash flow position. Just as importantly, we're seeing clear evidence that the changes we've made to the group over recent years are now delivering. This morning, I'll take you through the H1 performance, the progress we're making on margins and cash flow and the key trends shaping both Nutrition and Beauty. I'll then finish with the outlook for the remainder of the year before we take questions. Before getting into the numbers, I think it's worth spending a moment on how we've arrived here. Over the past few years, we've made some significant changes to THG. Since 2022, we've materially simplified the group. We've sold noncore businesses, reduced our geographic footprint and focused our resources on fewer larger markets where we have a proven right to win. The demerger of THG Ingenuity at the start of 2025 was a major milestone in that journey. It's transformed THG from a CapEx-heavy cash-consumptive operating model into a capital-light group focused on 2 market-leading global businesses, THG Nutrition and THG Beauty. We've also demonstrated the significant unrecognized value within the group. The sale of Claremont Ingredients for GBP 103 million last year is a good example of this, and we continue to consider similar opportunities where they make sense. Alongside this simplification, we've been relentless on costs. Over the past 18 months alone, group headcount has reduced by approximately 25%. We continue to scrutinize our supplier base and increasingly use AI and robotics to drive efficiency across the business. But what's particularly important is that none of this has come at the expense of growth. We fundamentally reshaped the group while continuing to grow the top line and invest behind our strongest opportunities. So today, THG is a much simpler business. We have 2 market-leading digital-first businesses operating in attractive global growth markets. A lot of the heavy lifting has now been done. We are now firmly in execution mode. And that brings me to the H1 results. Group revenue increased by 7.2% to GBP 828.7 million, reflecting strong momentum across the business. In Nutrition, our omnichannel strategy continues to deliver. We grew revenue across both online and offline channels, creating a broader and increasingly resilient business. In Beauty, we continue to take market share across our core territories. In the U.K., Look -- fantastic and Cult Beauty delivered exceptional growth of 6.7%. But the most important feature of H1 is the quality of that growth. Revenue growth, combined with the operational efficiencies we've delivered across the group drove a significant improvement in profitability. Adjusted EBITDA reached GBP 42.8 million, more than double the prior year when adjusting for the disposal of Claremont Ingredients. And that improvement in profitability is increasingly translating into cash. We delivered a significantly improved free cash flow position in H1, giving us confidence in the group's ability to generate sustainable positive free cash flow from here on. Cash generation remains one of our key priorities. The changes we've made to THG have fundamentally improved the cash characteristics of the group. Following the Ingenuity demerger, capital expenditure and lease payments have reduced substantially. We've refinanced our debt facilities through to the end of 2029, disposed of selective assets, reduced leverage and lowered our cash interest costs. As a result, we enter H2 with real confidence in our ability to deliver GBP 25 million to GBP 35 million of positive free cash flow for the full year. That confidence is underpinned by the H1 delivery of GBP 42.8 million adjusted EBITDA with LTM EBITDA of GBP 95.4 million. We also expect the normal seasonal working capital inflow in H2, supplemented by further initiatives to optimize stock holdings and improve working capital across the group. I also want to briefly update you on THG Nutrition's VAT claim. HMRC has informed us that it is dealing with a significant volume of industry-wide claims covering more than 300 products across nearly 100 brands. As a result, HMRC requires additional time to assess the accuracy of those claims and now expects to provide us with an update by the end of October 2026. Turning to Nutrition. The sports nutrition market is going through a major structural shift. What was once a category predominantly focused on dedicated athletes has rapidly moved into the mainstream. Consumers are increasingly focused on protein, health and active lifestyles. Wearable technology is accelerating that trend and GLP-1 usage is creating another significant driver of protein consumption. Against that backdrop, we believe Myprotein is exceptionally well positioned. And the scale the brand is now achieving globally is significant. During H1, we sold approximately 58.5 million Myprotein branded products worldwide. That compares with approximately 37.2 million in H1 last year. We believe this makes MyProtein the world's #1 sports nutrition brand by unit volume and by some distance, selling at least twice the number of products of our nearest global competitor. And there's another important point. Despite already operating at this scale, MyProtein grew branded unit volumes by 57% in half 1. We believe that makes MyProtein not only the largest sports nutrition brand globally by unit volume, but also the fastest growing amongst the established global competitor set. That combination of scale and growth is incredibly powerful, and it reflects the work undertaken during 2023 and 2024 to reposition and globally rebrand MyProtein. We are now seeing the benefits of that work across multiple channels and categories. We've launched new products designed to help consumers manage the impact of whey inflation. Our expansion into adjacent categories is delivering strongly with activewear producing another standout performance in half 1. Licensing also continues to grow rapidly. The strength and recognition of the MyProtein brand is enabling us to establish 2-way licensing partnerships with some of the world's largest consumer groups. There is plenty more to come. We have a strong pipeline of new products and licensing partnerships progressing through half 2, which we'll announce in due course. At the same time, we've had to navigate an extraordinary whey inflation cycle. Since 2021, whey protein costs have increased approximately fivefold. That creates obvious pressure both for consumers and for industry margins. But our response has been to adapt the business rather than simply absorb those pressures. We've expanded into licensing, new categories and trade retail while developing new cost-focused products to give consumers greater choice. And despite further whey inflation during H1, we still delivered solid margin progression. We are now also beginning to see signs of change in the whey market. Significant new supply is entering the market, and we're finally seeing evidence of stabilization together with indications of forthcoming price reductions. If that continues, it would provide a meaningful tailwind as we move into 2027. Combined with the structural changes we've already made to the Nutrition business, this gives us increasing confidence in the trajectory towards our targeted 12% EBITDA margin. Turning to Beauty. We are fortunate to operate in another attractive global growth market, but the way consumers discover and buy beauty is changing rapidly. Premium Beauty continues to grow, while online continues to take share from traditional bricks-and-mortar retail. At the same time, live shopping, social commerce and now agentic commerce are fundamentally changing product discovery. That plays directly to our strengths. Beauty brands increasingly need digital partners capable of reaching and engaging with younger consumers across these emerging channels. And THG Beauty is already demonstrating its leadership here. I'm pleased to confirm that Look -- fantastic is recognized as the #1 multi-brand beauty retailer on TikTok Shop for 2026. That matters not simply because of the sales generated directly through TikTok. Our presence across TikTok and other social platforms also drives brand awareness, attracts new customers and ultimately generates incremental traffic back to our own websites. It creates a powerful customer acquisition engine. And we intend to stay at the forefront of how the market evolves. And so I'm also pleased to announce a new partnership with Google with THG Beauty participating in 3 pilot programs over the next 6 months. These pilots will help ensure we remain at the forefront of how beauty products are discovered and purchased in an AI-first world. We're also benefiting from other rapidly developing consumer trends. K-Beauty continues to grow strongly, while GLP-1 medication is beginning to influence beauty and wellness regimes. Being early to these trends allows us to bring new customers onto our platforms and strengthen our relevance with brand partners. During H1, we added more than 50 new brands across our sites, including the recent addition of prestige brand, Claren's. Our proposition is increasingly differentiated. We combine deep relationships with premium global brands, leading digital capabilities, AI, social commerce expertise and market-leading global fulfillment. Our focus in H2 is simple: continue taking share and ensure THG Beauty remains at the forefront of the digital beauty market. There is another important part of the Beauty business that is sometimes less visible, our manufacturing operations. We have significant beauty manufacturing businesses in both the U.K. and the U.S., developing and manufacturing products for some of the world's leading prestige beauty brands. These operations not only generate revenue and profit, they give us valuable insight into emerging brand and product trends and deepen our relationships with global beauty partners. Our U.K. operation is the country's largest prestige beauty manufacturer. It delivered a stellar half 1, supported by new contract wins and continued cost discipline. In the U.S., the new business pipeline remains strong. However, the business experienced delays in receiving packaging components as a result of the Heras straight issues, which constrained dispatches during half 1. Those orders haven't disappeared. They've merely been delayed. As that backlog is dispatched, we expect a strong Q4 from the U.S. manufacturing business. Finally, turning to the outlook. The strong H1 performance means LTM adjusted EBITDA to June now stands at GBP 95.4 million, leaving us well positioned to deliver full year expectations. Looking at Q3, across our core brands and markets, trading has remained encouraging with approximately 5% revenue growth achieved in July and August. However, we did see some softness in other parts of the business, including from the impact of introduction of EU duties, which we are in the progress of mitigating as well as some phasing of own brand sales. Encouragingly, September has started well. The gifting season is now underway, and we've seen a positive early customer response, including to our all-important advent calendars, where we expect to sell over 250,000 units this year. For Q3, we expect constant currency sales growth of approximately 2% with earnings and cash remaining robust. For Q4, we expect revenue growth to accelerate to approximately 6% to 7%. Within Nutrition, MyProtein's branded unit volumes are expected to continue their rapid growth trajectory. Following 58.5 million units sold in half 1, MyProtein remains on track to sell approximately 130 million branded units for the full year of 2026. And alongside that growth, our focus on cash remains absolute. We remain on track to generate GBP 25 million to GBP 35 million of positive free cash flow in the full year while continuing to grow market share and progress margins. Looking further ahead, the combination of EBITDA growth and improving cash flow through '26 and '27, together with the conclusion and receipt of the HMRC VAT claim should see group net debt reduced to approximately 1x leverage for full year 2027. And there is potential upside beyond that. Following the GBP 103 million sale of Claremont last year, we continue to receive third-party interest in a number of noncore assets. Should any meaningful transaction materialize over the year ahead, the group would move into a net cash positive position by the end of full year '27. We also remain confident in the sustainability of our baseline divisional EBITDA margins of more than 6% for THG Beauty and more than 12% for THG Nutrition. For Nutrition specifically, improving visibility on whey costs and continued diversification of revenues provide confidence in returning to those medium-term margin levels. So stepping back, the direction of travel is clear. We have simplified THG. We have 2 market-leading global businesses. We are growing revenue and taking market share. And at the same time, margins are expanding. Cash generation is improving materially. And at the same time, the balance sheet is strengthening. A lot of the hard work and restructuring is now behind us, and our focus from here is on execution, delivering profitable growth, sustained positive free cash flow and the significant value we believe exists within THG. Thank you all for joining us today. We would now be happy to take your questions.

[Operator Instructions] We'll now take our first question from John Stevenson from Peel Hunt.

I'll start on licensing, if we can on Nutrition. Obviously, going really well, particularly in the U.K. and particularly with both new agreements coming on stream and the existing ones are scaling well. Can you talk about the opportunities that exist to take either existing licenses into European and other territories or indeed some new relationships for licenses moving into Europe and other territories? Second question, just on those GLP-1 trends and how they impact the business. Can you talk a little bit more about what's coming through in NPD as a direct consequence of this and sort of shopping trends, both online and offline directly down to GLP-1? Just a quick one on the acquisition actually on the mic. Just can you talk about the state of play any potential disposals, please?

I missed the last question there, sorry, the state of play on Disposals.

Any potential...

Yes, sure. Look, not easy to answer the first 2, particularly because of sort of certainly the first one around licensing just around, a, some of the confidentiality that we have; and b, giving competitors a heads up sometimes on some of the actions that we're doing. That said, you're absolutely right that quite often what we would do with a licensing agreement, in fact, more often than not, any major licensing agreement typically starts in one territory and then gets expanded beyond that into other territories as we see the given success. So what I would say is some of the major ones that you will have seen that we've announced in the past 6 months or more have seen really good success, right? So the licensing part has been particularly strong for Myprotein and it's strong for all parties that are involved. So we bring new customers. We've got obviously a very big global following. These brands want to access these types of consumers. And so by partnering together, we're bringing our customer base to their products. And so we've done that typically in the markets that were strongest. We almost always start in the U.K. Sometimes in the U.S. as well, we've got some U.S.-first partnerships, particularly. And even in Asia, we have a few that are Asia specific. But certainly, with the U.K. and the U.S., once we've launched there, we would then typically -- once we've proved the success to both parties, we'll then go and roll that out. So that's why you can get really good confidence in the volume growth that we're seeing around some of these licensing deals. And that's both ways. So where we license the brand, our brand out or where we license these big brands in. So you're seeing really good progress on some of the dairy products that we have in grocers across the U.K. at the moment. So you shouldn't be surprised to see if that expands into other territories, even with other brands, including existing brands. And then similarly, we've got some really big major global confectionery brands that we're going to some territories with and we should be set to expand them to. So there's a lot more of that coming. Some really interesting things as well around the licensing side where -- we're targeting specific channels. So we look at it from how do we get into that channel. We think that's a really good marketing opportunity for us and a revenue opportunity and people touch those areas every single day. So convenience is a key focus for us, but -- and that can then go to things like coffee shops, et cetera. So you'll have seen maybe that we've done a deal with Five Guys where Myprotein product goes into the shakes in Five Guys, but that's just the start really scratching the surface that you should see some pretty substantial expansion across the coffee market and which is a really, really good touch point for us. So we're looking at all of those channels and licensing deals are one of the key ways that we'll get into that. And we'll keep you posted on -- we'll announce them as we expand some of these major partnerships. Second question you asked was on GLP-1 products. Look, I think your key focus on GLP-1 is just driving mainstream into the protein market. So I think to a degree, yes, we launched GLP-1 focused products, but actually, it's the education point. So if you're a mainstream consumer and you're coming in, you're being advised you need to take protein because you're going to be deficient in it, then actually, it's the education that you need because we sell -- we have lots of products that all products that we sell would pretty much fit a GLP-1 consumer. So they just need the education process of what best suits their needs. So we don't sit there and directly say, that's a perfect GLP-1 product. What we'll do is say this is something that a GLP-1 consumer in the mainstream can understand quite readily and we'll address it in that kind of fashion. So it's educating the mainstream market is a real focus of ours as opposed to here's that product. And then the final thing on assets doing another Claremont. Look, the truth is we've had a number of bids against a number of assets, which would be deemed as noncore to some people. We've always got strategic reasons as to why we have these things. But if the valuation is correct, then, of course, we -- and it makes sense to us, then we'll go and do that. And so look, there's no progress that I would give an update on here. To date, we've said no to all offers that have come in for any of our assets so far because we just don't deem that they're a fair reflection on the strength and value of them. But that doesn't mean that at some point in the near future, we might come with some different news on that.

[Operator Instructions] There are currently no further questions. With this, I'd like to hand the call back over to Matt for closing remarks.